Debt reduction strategies

Everything you need to know about taking control of your debt.

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For many of us, dealing with debt is an unfortunate side effect of everyday life. Whether it’s a home loan, credit card debt, car loan, personal loan or a combination of any of the above, debt can place you under huge financial pressure and be completely overwhelming.

But there’s plenty you can do to reduce your debt and seize back control of your finances. There are several debt reduction strategies available to help you get back in the black, so let’s take a closer look at each of them to work out which one is right for you.

Understanding debt

No two debts are the same and because of this, there is no one surefire way to reduce your debts. One of the main problems people run into is having too many separate debts to manage. If you take out a car loan, have multiple credit cards or a mortgage, then managing your repayments can get complicated. The first thing to do is to sit down and work out all of the different lenders you owe money to, how much money you still owe, what you are paying in interest and how much your repayments are. Then you can get a realistic amount which you're putting towards your debts each month.

When you break all of these debts down, you can identify the lenders to which you are paying the highest interest rates and fees. For example, you may have a couple of credit cards with higher interest rates than the others, or you may be paying more in unsecured personal loan fees and interest than you are for a car loan. By understanding your debts you can decide on an appropriate strategy to manage them. No matter how many separate debts you have to how many lenders, there are several debt reduction strategies which can help you take control of your repayments and better manage your debt. Take a look below at the debt reduction strategies which you may want to consider.

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Strategy #1: Snowball method

If you’ve done any research at all into taking charge of debt, you’ve probably heard of the snowball method.This debt reduction strategy gets its name from its ‘start small and get bigger’ approach to paying off your debts. The basic premise is simple: start by paying off the smallest debt first, then work up to the larger ones.

To get started, make a list of all your debts from the smallest amount to the largest. Don’t worry about the interest rate attached to those debts unless two amounts are the same – when this occurs, pay off the debt with the highest interest rate first.

Once you’ve finalised your list, it’s then a matter of making the minimum repayment on all debts except the smallest amount. For this debt, repay as much as you can afford each month until it is completely repaid, and you can then move on to the next amount on your list.

Why should you consider the snowball method?

The strength of the snowball method lies in its ability to let you start repaying your debts one small step at a time. As your debts are paid off one by one, your confidence in your financial management skills will grow and you may be able to gather the momentum you need to climb your personal mountain.

When might the snowball method not work?

The downside of this method is that it won’t always be the most cost-effective way to get out of debt. In many cases, tackling the largest debt or the amount accruing the highest rate of interest is the best place to start.

Strategy #2: Avalanche method

The snow theme continues with the avalanche method, which is also known as debt stacking. Rather than listing debts in order from the smallest to the largest amount, this method involves listing your debts from the highest interest rate to the lowest interest rate. Don’t worry about the dollar amount unless the interest rates on two separate debts are the same, in which case you pay off the higher amount first.

From this point on the process is quite similar to the snowball method. Pay the minimum payment on all debts except the one with the highest interest rate, towards which you should contribute as much as you can afford each month. Once this debt is repaid, move on to the next amount on your list.

Why should you consider the avalanche method?

The avalanche method is usually seen as a logical choice when selecting a debt reduction strategy. This is simply because it’s a more cost-effective way to pay down your debts, allowing you to spend as little as possible to get back on track.

When might the avalanche method not work?

The downside of the avalanche method is that it can initially take a while to pay off debts. While the snowball method provides quick gratification and the psychological boost of paying off small debts first, the avalanche approach doesn’t offer the same instant rewards. As a result, some people can become discouraged and lose their disciplined approach to debt repayment.

Strategy #3: Debt tsunami method

Many finance experts advise leaving your emotions out of it when reducing your debt – after all, letting our hearts rule our heads is one of the ways many of us ended up in debt in the first place. But the debt tsunami method, named by Adam Baker from Man vs Debt, advocates a different approach.

The idea behind the debt tsunami approach is to pay off your debts in order of their emotional impact. Instead of worrying about the amount you owe or the interest rate that applies, prioritise the debts that have the greatest psychological weight.

For example, while a $5,000 credit card debt at 15% p.a. may be costing you the most, you may first want to pay back the $1,000 your best friend loaned you interest-free when you fell on hard times.

Why should you consider the debt tsunami method?

While it’s impossible to deny the logic of finding the most cost-effective way to reduce debt, it’s also hard to go past the emotional influence debt can have over our lives. The strength of this approach lies in its ability to allow you to reduce the psychological impact of debt, and to find the necessary motivation to seize control of your finances.

When might the debt tsunami method not work?

The unavoidable truth is that there are cheaper ways to reduce your debt than the debt tsunami approach. If paying off your debt in the most cost-effective way possible is important to you, consider other options.

Strategy #4: Balance transfer credit cards

Have you accumulated debt across multiple credit cards? Are you struggling to manage the repayments and high interest rates for each separate credit card debt?

If so, you might be able to bring your credit card debt under control by consolidating multiple credit card accounts onto a single credit card with a balance transfer. There are myriad balance transfer credit cards available that let you move your debt over to a new card and take advantage of no interest charges for an introductory period – for example, 0% p.a. on balance transfers for the first 6 months.

Some credit card providers will also let youbalance transfer personal loan debt, providing another flexible option to help you bring your finances under control.

Why should you consider a balance transfer credit card?

It’s common knowledge that credit card interest rates can be painfully high, so taking advantage of a no-interest-rate period can be an excellent way to bring your debt under control. Only having to make one monthly repayment rather than several separate repayments for each individual debt can also make it much easier to manage your money.

When might a balance transfer credit card not work?

If you’re thinking of applying for a balance transfer credit card, remember that you’ll typically need a good credit history in order to be approved. You should also be aware that some card providers charge a balance transfer fee, and check the fine print to find out what interest rate will apply when the introductory period ends.

Updated December 15th, 2019
$
% p.a.
Name Product Balance transfer rate Purchase rate (p.a.) Annual fee Amount saved
Citi Rewards Platinum Credit Card - Balance Transfer Offer
0% p.a. for 26 months with 1.5% balance transfer fee
21.49% p.a.
$49 p.a. annual fee for the first year ($149 p.a. thereafter)
Earn reward Points per $1 spent and take advantage of a 0% p.a. for 26 month balance transfer offer and a discounted $49 first year annual fee.
St.George Vertigo Classic
0% p.a. for 18 months
13.99% p.a.
$55 p.a.
Get 0% p.a. interest for up to 18 months on balance transfers with no balance transfer fee. Plus, a low annual fee and purchase rate.
Virgin Australia Velocity Flyer Card - Bonus Points Offer
0% p.a. for 18 months
20.74% p.a.
$64 p.a. annual fee for the first year ($129 p.a. thereafter)
Earn up to 70,000 bonus Velocity Points (60,000 in 3 months and 10,000 after first year). Plus, save with 0% p.a. for 18 months on balance transfers.
Citi Rewards Platinum Credit Card - Exclusive Offer
0% p.a. for 13 months
0% for 13 months, reverts to 21.49% p.a.
$49 p.a. annual fee for the first year ($149 p.a. thereafter)
Finder Exclusive:
Save with 0% interest on purchases and balance transfers for 13 months (with no BT fee). Plus, a discounted $49 annual fee for the first year.
Citi Clear Platinum Credit Card
0% p.a. for 9 months
0% for 9 months, reverts to 14.99% p.a.
$0 p.a. annual fee for the first year ($99 p.a. thereafter)
Enjoy a $0 first year annual fee and a 0% introductory rate on purchases and balance transfers. Plus, complimentary purchase insurance cover.

Compare up to 4 providers

Strategy #5: Debt consolidation personal loans

Juggling multiple repayments can be costly and confusing, so you may want to consider consolidating all those debts into a single personal loan. Debt consolidation personal loans allow you to cut down the total amount you pay in interest charges, while it can also help you save money on fees.

There are unsecured personal loans available, or you may also be able to find the right loan by accessing the equity you have in your home. You also have the flexibility to choose a fixed- or variable-rate loan.

Updated December 15th, 2019
$
Name Product Interest Rate (p.a.) Comparison Rate (p.a.) Min Loan Amount Loan Term Application Fee Monthly Service Fee Monthly Repayment
Symple Loans Personal Loan
From 5.75% (variable)
6.89%
$5,000
1 to 7 years
from 1% to 5% of the loan amount
$10
You'll receive a personalised interest rate from 5.75% p.a. to 19.99% p.a. based on your risk profile
Borrow up to $50,000 to pay for what you need.
SocietyOne Unsecured Personal Loan
From 7.5% (fixed)
9.51%
$5,000
2 to 5 years
from 3% of loan amount
$0
You'll receive a fixed rate between 7.5% p.a. and 20.49% p.a. based on your risk profile
A loan from $5,000 to use for a range of purposes. Benefit from no ongoing fees and no early repayment fee.
RateSetter Unsecured Personal Loan - 3yr Variable
From 6.89% (variable)
8.89%
$2,001
6 months to 5 years
$299 (Based on $10,000)
$0
You'll receive a variable rate between 6.89% p.a. and 16.4% p.a. based on your risk profile
A flexible loan with amounts from $2,001 and terms starting from 6 months. Interest and comparison rates calculated for a loan term of 3 years.
Harmoney Unsecured Personal Loan
From 6.99% (fixed)
7.69%
$2,000
3 to 5 years
$500 ($200 for loans of below $5,000)
$0
You'll receive a fixed rate between 6.99% p.a. and 28.69% p.a. based on your risk profile.
Apply for a loan up to $70,000 and repay your loan over 3 or 5 years terms.
NOW FINANCE Personal Loans
From 8.95% (fixed)
10.56%
$5,000
18 months to 7 years
$495 (Based on $10,000)
$13
You'll receive a fixed rate between 8.95% p.a. and 16.95% p.a. based on your risk profile
Apply for loans from $5,000 and get a dedicated loan manager. No security required. Note: Applicants approved before 31 December 2019 will receive a special offer $200 Coles Gift Card.
CUA Unsecured Fixed Rate Personal Loan
9.89% (fixed)
10.14%
$5,000
1 to 7 years
$175
$0
You'll receive a fixed rate of 9.89% p.a.
An unsecured loan from $5,000 with flexible repayments and no monthly fee.
NAB Personal Loan Unsecured Fixed
From 10.69% (fixed)
11.58%
$5,000
1 to 7 years
$150
$10
You'll receive a fixed rate between 10.69% p.a. and 18.69% p.a. ( 11.58% p.a. to 19.53% p.a. comparison rate) based on your risk profile
An unsecured loan up to $55,000 you can use for a range of purposes and pay off over up to 7 years. Note: Majority of customers will get the headline rate of 12.69% p.a. (13.56% p.a. comparison rate) or less. See Comparison rate warning in (i) above.
St.George Unsecured Personal Loan - Fixed Rate
From 11.49% (fixed)
12.57%
$2,000
1 to 5 years
$195
$12
You'll receive a fixed rate between 11.49% p.a. and 17.4% p.a. based on your risk profile
A low minimum borrowing amount of $2,000 to fund a range of purposes.
Latitude Low Rate Personal Loan (Unsecured)
10.99% (fixed)
12.21%
$20,000
1 to 7 years
$250
$13
You'll receive a fixed rate of 10.99% p.a.
A secured or unsecured loan available to homeowners with a large minimum borrowing amount of $20,000. Benefit from flexible repayments and fast approval.
Australian Military Bank Fixed Rate Personal Loan
From 7.93% (fixed)
8.77%
$1,000
1 to 5 years
$500 (from $100 to $500)
$10
You'll receive a fixed rate between 7.93% p.a. and 18.87% p.a. based on your risk profile
An unsecured loan with a low minimum borrowing amount and flexible repayment options.
Latitude Personal Loan (Unsecured)
From 13.99% (fixed)
15.19%
$3,000
1 to 7 years
$250 (Loans under $5000 - $140)
$13
You'll receive a fixed rate between 13.99% p.a. and 24.99% p.a. based on your risk profile
Apply for what you need from $3,000 and use it for a range of purposes. Flexible repayments options.
CUA Unsecured Variable Personal Loan
11.89% (variable)
12.15%
$5,000
1 to 7 years
$175
$0
You'll receive a variable rate of 11.89% p.a.
Borrow from $5,000 with the option for flexible repayments and no monthly fees.
CUA Discount Variable Personal Loan (Loans over $30,000)
10.89% (variable)
11.15%
$30,000
1 to 7 years
$175
$0
You'll receive a discounted variable rate of 10.89% p.a.
Borrow over $30,000 and receive a discounted interest rate. No monthly fees and a redraw facility also available.
NAB Personal Loan Unsecured Variable Rate
From 10.69% (variable)
11.58%
$5,000
1 to 7 years
$150
$10
You'll receive a variable rate between 10.69% p.a. and 18.69% p.a. ( 11.58% p.a. to 19.53% p.a. comparison rate) based on your risk profile
An unsecured loan up to $55,000 you can use for a range of purposes. Benefit from fee-free additional repayments and a redraw facility. Note: Majority of customers will get the headline rate of 12.69% p.a. (13.56% p.a. comparison rate) or less. See Comparison rate warning in (i) above.
Australian Military Bank Variable Rate Personal Loan
From 7.88% (variable)
8.72%
$1,000
1 to 7 years
$500 (from $100 to $500)
$10
You'll receive a variable rate between 7.88% p.a. and 18.82% p.a. based on your risk profile
An unsecured loan with flexible repayment options and a low minimum borrowing amount.
Westpac Unsecured Personal Loan
11.99% (fixed)
13.15%
$4,000
1 to 7 years
$250
$12
You'll receive a fixed rate of 11.99% p.a.
Benefit from the security of a fixed rate with the flexibility of additional repayments.
Latitude Low Rate Personal Loan (Secured)
9.99% (fixed)
11.22%
$20,000
1 to 7 years
$250
$13
You'll receive a fixed rate of 9.99% p.a.
A secured or unsecured loan available to homeowners with a large minimum borrowing amount of $20,000. Benefit from flexible repayments and fast approval.

Compare up to 4 providers

Why should you consider a debt consolidation personal loan?

Debt consolidation personal loans can help reduce your interest payments and loan fees – you only have to pay interest and monthly fees on one loan, not across several debts. They can also make it easier for you to manage your finances, as you only have to worry about making regular repayments on one loan.

When might a debt consolidation personal loan not work?

Many lenders will only accept borrowers with a good credit history, so finding funding from a reputable lender can be difficult for borrowers with bad credit. You’ll also need to read the fine print and make sure you’re fully aware of the interest rate, fees and charges that apply to a debt consolidation loan so you can be sure it will actually save you money.

Strategy #6: Part 9 debt agreements

A part 9 (or part IX) debt agreement is a binding agreement between you and your creditors. When you enter into one of these agreements, you commit to pay a sum of money that you can afford in order to settle your debts.

A part 9 debt agreement is an act of bankruptcy which, while different from declaring yourself bankrupt, can have serious financial consequences. With this in mind, you’ll need to carefully consider your options before deciding whether it’s the right choice for you.

Why should you consider a part 9 debt agreement?

If you’re under significant financial pressure and struggling to repay your debts, a debt agreement can help you avoid bankruptcy, get your creditors off your back and stop you sinking even further into the red.

When might a part 9 debt agreement not work?

You should consider all other debt reduction options before entering into a debt agreement. Not only will the debt agreement appear in your credit file for five years but your name will also be entered on the National Personal Insolvency Index (NPII) for a limited period of time. This can have a huge impact on your ability to access credit.

And if you fail to keep up with the repayment schedule outlined in the agreement, you can lose your secured assets and your creditors could apply to the court to have you declared bankrupt.

Which debt reduction strategy is right for you?

This depends on a range of factors. Everyone’s financial circumstances are different, no two debts are the same, and the psychological approach you have towards debt can have a big impact on your choice of strategy.

The most important thing you can do is create a plan and stick to it. Work out which strategy you want to use and decide on a realistic and affordable way to start taking control of your debt.

And remember that if you need help, the National Debt Helpline provides a free financial counselling service. For independent and confidential advice, phone 1800 007 007.

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RateSetter Unsecured Personal Loan - 3yr Variable

You'll receive a variable rate between p.a. and 16.40 p.a. based on your risk profile
A flexible loan with amounts from $2,001 and terms starting from 6 months. Interest and comparison rates calculated for a loan term of 3 years.

Logo for Harmoney Unsecured Personal Loan
Harmoney Unsecured Personal Loan

You'll receive a fixed rate between 6.99% p.a. and 28.69% p.a. based on your risk profile.
Apply for a loan up to $70,000 and repay your loan over 3 or 5 years terms.

Logo for NOW FINANCE Personal Loans
NOW FINANCE Personal Loans

You'll receive a fixed rate between 8.95% p.a. and 16.95% p.a. based on your risk profile
Apply for loans from $5,000 and get a dedicated loan manager. No security required. Note: Applicants approved before 31 December 2019 will receive a special offer $200 Coles Gift Card.

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Westpac Unsecured Personal Loan

You'll receive a fixed rate of 11.99% p.a.
Benefit from the security of a fixed rate with the flexibility of additional repayments.

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